Financial Sector Consolidation

• Cabraal’s Vision: Five “Top” Banks By 2016

Central Bank of Sri Lanka (CBSL) will uplift banks’ minimum shareholder limits from the current 10% to 15% where CBSL’s approval is not required and from 15% to 20% where CBSL’s approval will however be required.

This is for the purpose of consolidation, market sources told this newspaper.

CBSL Governor Ajith Nivard Cabraal unveiling CBSL’s Monetary and Financial Sector Policies for 2014 on Thursday (January 2) said that the banking sector vision is to have at least five Sri Lankan banks with assets of Rs. one trillion each in another two year time (2016).

According to a booklet released by CBSL on this occasion, the total banking sector’s asset base at end November 2013 was Rs. four trillion. However, CBSL sources told this reporter on Friday (January 3) that though there have had been talks in regard to enhancing bank shareholdings, no finality has been taken in this connection.

According to CBSL’s 2012 Annual Report, there were a total of 24 licensed commercial banks ((LCBs) 12 each of foreign and local banks respectively) in the country.

Banking sources  also said that CBSL wanted the banking sector to be consolidated in to 10 and the present 58 non banking financial institutions ((NBFIs), ie licensed finance companies (LFCs) and specialized leasing companies to 20.

The move to consolidate the banking sector to 10 banks/companies however couldn’t be immediately confirmed from CBSL sources.

Cabraal in his speech confirmed that there was however such a move in regard to NBFIs, ie constricting its total to 20, which will have to be completed by next year.

He also said that there are moves in regard to the consolidation of the banking sector, but didn’t give any numbers or any time frames.

11 Banks

Cabraal further said that currently 11 banks have an asset base of over Rs. 100 billion whilst enjoying 90% of the market share. “.. banks with assets less than Rs. 100 billion will be expected to grow beyond Rs. 100 billion through organic growth or consolidation/merger with other banks/NBFIs over a reasonable time horizon..,” a booklet released by CBSL on Thursday unveiling its 2014 roadmap said.

He also mooted for a “Pradeshiya Sanwardhana Bank” for purposes of microfinance.

Cabraal further said that the minimum capital of banks will be raised to Rs.  10 billion by January 1, 2016; while in the case of new banks and licensed specialized banks (LSBs) it will be raised to Rs. five billion by next year. Licensed finance companies (LFCs) will have to increase their minimum core capital to Rs. one billion by 2016 and to Rs. 1.5 billion by 2018.

Currently the legislated requirement of core capital for LFCs is Rs. 400 million, that of licensed commercial banks (LCBs) Rs. four billion, which would have had had to be raised to Rs. five billion by next year under the previous rules, while that of LSBs had had been Rs. 2.5 billion at present and which had had to be raised to Rs. three billion by 2015.

Cabraal also said that the reasons behind this move in regard to financial sector consolidation were to be prepared to meet any crisis. CBSL is the sole licensor of Sri Lanka’s banking and non banking financial sectors.

However  banking sources alleged that the reason behind the proposed mergers was for banks to have strong balance sheets so that they can procure international funds on behalf of the Government of Sri Lanka (GoSL) from overseas funding agencies.

In a rising interest rate market globally, state owned Bank of Ceylon raised US$ ($) 500 million at a 5.3% interest rate in April 2013, NSB $ 750 million at an 8.875% interest rate in September and DFCC Bank $ 100 million at a 9.6% interest rate in October.

The sources further alleged that if banks do not move towards consolidation by the middle of the year, CBSL would move towards forced mergers, a step which Malaysia had taken previously. In this connection Cabraal said that banks will have to submit their mergers and acquisition (M&A) plans by June of this year.

The mergers were for the purpose of strengthening banks’ balance sheets.

Shareholder Limits

Vis-à-vis the banking sector, currently, there are certain individuals together with related parties, as well as banks, which have had exceeded the present minimum shareholder threshold limits, with CBSL approval.

For instance business magnate Dhammika Perera and related parties currently have a 40% stake in Pan Asia Bank and DFCC Bank has an over 90% stake in DFCC Vardhana Bank. Additionally, JKH has a near 30% stake in NTB.

Notwithstanding the current and proposed enhanced shareholder limits, it’s also learnt that the state through its agents such as the EPF has a 19% stake in Commercial Bank and over a 30% stake each in banks such as HNB, DFCC and NDB.

It’s also learnt that the Government is allegedly working on a forced merger of NDB and DFCC with no staff retrenchment.  A director of a conglomerate told this reporter recently, banking sector consolidation can take place only if Sri Lanka’s labour laws are relaxed, as otherwise there may be a duplication of back office functions.

A banker said, if bank x and bank y are merged, and if prior to their merger they had a chief financial officer (CFO) each, can the merged bank function with two CFOs?  he asked.

Meanwhile, Cabraal in his speech confirmed that they want NDB and DFCC to merge. There has to be a one large development bank, he said.

DFCC and NDB were originally set-up as development banks, but they now virtually operate as commercial banks, with DFCC through their subsidiary DFCC Vardhana Bank in which they have a 90% stake.

When this reporter asked NDB sources that, if in the event of the merger of DFCC and NDB, will they be functioning with two CFOs due to the absorption of the two merged banks CFOs to the new entity? They in reply said that in due course they will give an answer to that query.